Henry & His Hatchet

"In times like this if a corporation earns 6% on its invested capital it ought to be satisfied."

So said Secretary of the Treasury Henry Morgenthau, testifying last week on the price-control bill before the House Banking & Currency Committee. Reporters ran for the telephones. His words were news, even if taken at their face value as a demand that business confine itself to modest profits for the duration. They were far bigger news as the first gun of a campaign for a new type of tax bill that would shake the foundation of free enterprise in the U.S.

The idea of making business give up all abnormal profits till war's end makes arguable sense in a national emergency.* Britain already has such a law. But the bill which Secretary Morgenthau now has his Treasury experts drawing for presentation to Congress is something that will upset the principles which make the U.S. economic system work.

By 6% on invested capital, he explained, he meant 6% of the "dollars put into the business"--his experts would take many pages of the Bill defining it in detail. As an idea, this was a complete giveaway of Henry Morgenthau's economic limitations. It could only have come from a man who knew nothing more of U.S. business than as a bondholder who ventures nothing and owns nothing but a paper right to collect interest on the risks, brains, skill and effort of other men.

In its simplest form the basic unsoundness of his proposal is evident from a single example: One man may have founded a business by much effort, skill and good management with a $5,000 investment. Another man, less able and less hardworking, may have got a similar business going only after sinking $10,000 into it. Both may now make equal profits; but under a proposal like Henry Morgenthau's, the abler, harder-working man would be allowed to keep only half as much profit as his less competent competitor.

Hitherto all severe excess-profits taxes in the U.S. and Britain have avoided this pitfall by allowing businesses the alternative of computing their normal profits on the basis of an average of past earnings. But Henry Morgenthau sees business only in terms of dollars, not in terms of work and enterprise.

Under the type of excess-profits law which he has proposed before and is now going after again:

> Some corporations which usually have big invested capital (examples: utilities, railroads) might make big profits entirely free of excess-profits tax, while others which in their nature have small invested capital (examples: laundries, service corporations in general) might be allowed to keep almost none of their ordinary earnings.

> Corporations which were recklessly run and in the past had thrown investors' money around in the way that brought on the 1929 debacle might be lightly taxed. The best-run companies with the most conservative accounting practice might pay through the nose.

> Many an investor who had paid hard cash for securities would have his return on his actual investment cut far below 6% --perhaps to a fraction of 1%--for securities are bought at prices based on their earnings; but the amount of profits a company would be allowed to keep would depend on the number of dollars previous investors had once put into the business.

Boos & Catcalls. Congressmen, somewhat closer to business facts than Henry Morgenthau, reacted to the Secretary's proposal with cries of rage or the chill of absolute indifference. Nearly every Representative could point to at least one humming business in his own district which would be completely ruined if all returns over 6% of its puny original stake went to the Government. Democrats and Republicans alike were indignant. Everyone, in & out of Congress, agreed that no decent business in 1941 wants to make a fortune out of World War II, but neither did the U.S. want to make its ablest businessmen pay the whole bill. Said the New York Times:

"No principle could be more harmful to the growth or health of the free enterprise system. That system rests on the premise that capital should go where it is most needed, and that this usually is determined by where it is offered the highest rates of return. When one particular business or industry is overbuilt, rates of return drop; where another is underbuilt, rates of return rise. It is the working of this principle that has kept the intricate relationship of one business to another in balance while we grew to be the greatest industrial country in the world. An arbitrary fixed return would draw private capital not into the expansion of armament industries, where it is now desperately needed, but into industries that promised to fare best after the war."

Secretary Morgenthau, still looking shyly at his hatchet, admitted that "possible inequities" inherent in his proposal would have to be ironed out. Washington observers still expected that Congress, holding its nose as usual, would tie the usual rock to the Secretary's proposal. No one doubted that Mr. Morgenthau, with his incorrigible coupon-clipping conception of economics, would bring his little hatchet out again.

*Some of its drawbacks: it removes all monetary incentives to increase production and efficiency; takes away one check on inflation, since corporations tend to be free with money that they cannot save for their stockholders; may leave corporations in a weakened financial position to meet the slump and unemployment that will come with peace.

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